Notices to Members

NFA has received inquiries from Members regarding the treatment of deposits at foreign banks for purposes of meeting segregation, secured amount, liabilities owed to retail forex customers, and net capital requirements. The purpose of this reminder is to briefly summarize the current regulatory treatment of such deposits.1

Customer Segregated Funds and Secured Amount

CFTC Rules 1.49(d)(3) and 30.7 establish the requirements for the denomination and location of customer segregated funds and the secured amount, respectively.

Rules 1.49 and 30.7 provide, in pertinent part, that customer funds may be held at: (1) a bank or trust company located outside the U.S. if the institution has in excess of $1 billion of regulatory capital or its commercial paper or long-term debt or, if part of a holding company system, its holding company's commercial paper or long-term debt, is rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization; (2) a futures commission merchant registered with the CFTC; or (3) a derivatives clearing organization. For the secured amount, Rule 30.7 also permits funds to be held at a member of a foreign board of trade or its designated depositories or the designated depositories of a derivatives clearing organization. Rule 1.49 further requires that, unless a customer instructs otherwise, segregated customer funds must be held in the U.S., a money center country (i.e., Canada, France, Italy, Germany, Japan, and the U.K.), or the country of origin of the currency, provided that the firm continues to meet the segregation requirements set forth in Rule 1.49(e).

Liabilities Owed to Retail Forex Customers

NFA Financial Requirements Section 14 provides that a Forex Dealer Member may hold assets outside the United States for meeting its liabilities to U.S. customers only if those assets are in a money center country, as defined in CFTC Rule 1.49. Further, the institution at which the assets are held must be: (1) a bank or trust company regulated in the money center country in which it is located that has in excess of $1 billion of regulatory capital or its commercial paper or long-term debt or, if part of a holding company system, its holding company's commercial paper or long-term debt, is rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization; (2) an entity located in a money center country, regulated there as the equivalent of a broker-dealer or futures commission merchant, and either has in excess of $100 million of regulatory capital or have its commercial paper or long-term debt rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization; or (3) a futures commission merchant registered with the CFTC and a Member of NFA. If assets are being held in a money center country, the Forex Dealer Member must also file with NFA a signed agreement with the qualifying institution authorizing that institution to directly provide to NFA and the CFTC information regarding the Forex Dealer Member's accounts.

Net Capital

The instructions to the Form 1-FR-FCM provide that in order to be considered as current assets for capital purposes, offshore deposits of proprietary funds must be held in a major money market country2 at a bank or trust company that has net assets in excess of $100 million and is subject to regulatory supervision by an authority of a sovereign national government. These requirements are not the same as those for segregation and the secured amount, and a foreign depository may be permissible for one purpose but not the other.

1 This notice addresses only those requirements pertaining to foreign depositories and is not intended to address all requirements regarding the acceptance and holding of customer funds or the Member's capital. As always, Members are reminded to review all pertinent rules and regulations.